New Taxes? E-liminate the Notion
With the federal Advisory Commission on Electronic Commerce due to issue recommendations on Internet taxation in April and the moratorium on new Internet taxes ending in 2001, the heavy-duty lobbying has begun to convince the commission, and all of us, that we need new Internet taxes. Nothing could be worse for the San Fernando Valley.
The foremost claim from state and local officials is the supposed loss of revenue due to Internet purchases from out-of-state companies that don’t collect California sales tax. But sales and use tax is owed by the buyer, not the seller. If a company doesn’t collect it, California residents are supposed to remit the money to the State Board of Equalization, the agency responsible for sales and use tax collection.
This is not new; use tax has always been due for tangible property purchased outside California and brought back to the state. This includes mail-order purchases and that T-shirt you bought at the Grand Canyon last summer.
California businesses that collect sales tax generally are aware of this and pay. But the average consumer doesn’t.
And we generally can’t force out-of-state businesses to collect for us. A 1992 U.S. Supreme Court decision, Quill Corp. vs. North Dakota, held that a business had to have a “substantial physical presence” creating “nexus” in a state before the state could force it to become a tax collector. Thus some out-of-state companies with a branch office or retail outlets in California do collect and remit California sales taxes. But most don’t. And other states can’t force California businesses to collect their sales tax.
Because of the Quill decision, interested parties have proposed that the federal government expand nexus and force all companies to collect each state’s sales tax. But California alone has 31 county and city district taxes. Valley businesses have to collect for sales they conduct in the Town of Truckee Road Maintenance and Transaction Tax District and the Santa Cruz Public Library Transactions and Use Tax District, for example. Forty-five states impose a sales tax.
A significant economic beauty of the Internet is the small entrepreneur’s ability to put up an inexpensive Web site and instantly achieve access to a global marketplace. Saddling mom&pop.com; with 45 potential monthly sales tax returns--and their varying city and county jurisdictional taxes--is unacceptable. And what about foreign sales taxes? Should we force collection of those?
“Those aggressively pushing nexus liability in electronic commerce clearly have little understanding of the potential capability of technology,” says Dean Andal, Board of Equalization chair and Electronic Commerce Commission member. “The only economic consequence of pursuing this expansion of nexus is to encourage the jobs associated with developing electronic commerce to move to another state or another country.”
He’s right. Screaming to tax the Internet will only drive E-commerce companies and their high-paying jobs away. And for what? To try to collect taxes for feckless “economic development” programs whose goals are business retention and recruitment of high-technology, high wage-paying jobs? Huh?
Regardless, the revenue loss claim is specious. Sales tax revenues for all states grew at an average of 5.6% in 1998, and state governments have been running fiscal surpluses that totaled nearly $19 billion when last measured across all states in 1997. E-commerce has created enormous new wealth. Predictions of loss are speculative at best and based on an erroneous zero-sum assumption that all Internet sales replace local merchant sales.
And importantly, the essence of taxation is half the debate. Government is not a business and has no right to generic revenue for the sake of revenue. If basic services are provided for, officials should be happy that taxpayers are prospering.
In fact, numerous aspects of electronic commerce ease the burden of government and provide the result that elected officials claim they want. When books, video and music become intangible via digital downloads--and become sales tax free--isn’t the impact on the environment reduced by eliminating the packaging and materials previously required for production? Isn’t this a great thing for our Valley entertainment companies? Doesn’t this reduce recycling program costs?
And don’t we eliminate hundreds of vehicle trips--lessening wear and tear on roads and decreasing smog--every time our merchandise car-pools with the UPS guy? Don’t we save printing and labor costs every time someone downloads a form from the state of California’s Web site instead of requesting a mailed copy? Aren’t the access and benefits the Internet provides the disabled unprecedented?
President Clinton has called for a duty-free Internet, and numerous members of the Electronic Commerce Commission have called for a global tax-free zone. The commission should finalize these recommendations and not be swayed by those stuck in the last century, applying old thinking to a new economy.
